Daily Commentary

MarketMinder’s View: The University of Michigan’s Survey of Consumers hit a preliminary 48.2 in May, below analysts’ expectations and down -3.2% from April’s reading. As the title suggests, gas prices’ recent rise was a key point of worry, with one-third of respondents mentioning prices at the pump. Interestingly, this gloomier reading occurred alongside a rising stock market, solid economic data and continued rumblings of a diplomatic end to the war, suggesting sentiment is slow to catch up. That isn’t terribly surprising, especially when you consider the war’s most obvious effect on everyday life, higher gasoline prices, persists. To us, it is all another batch of evidence showing consumer sentiment reflects headlines and how people feel in a moment, usually influenced by the very recent past. It isn’t predictive, telling you little about how people will actually behave. The last few years’ economic and consumption growth alongside historically weak sentiment reads shows you that in action.

MarketMinder’s View: This long-ish piece backs into its thesis, which you will find in the last sentence: While stocks are rallying on optimism, bonds are stumbling on pessimism, and woe betide equity investors if stocks start seeing what bonds see. It asserts US stocks are up tied to America’s economic resilience amid wartime disruptions and robust corporate earnings growth (sensible, in our view), while bonds are grappling with stagflation fears as investors fear higher oil prices lifting inflation and hitting economic growth. Or as the article sums it up: “Fixed-income markets tend to focus on risks more than on the potential for windfall profits that the stock market cherishes.” We think this gets it wrong. Stocks and bonds move on supply and demand, but they have different demand drivers. Stocks largely move on expected earnings growth over the next 3 – 30 months, with political, economic and sentiment drivers factoring in. Bond demand tends to sway with inflation expectations (which affect interest rates), perceptions of credit risk and the like. Bonds are not more risk-focused. They just weigh different things. And, crucially, both are subject to short-term volatility, which we think this piece reads entirely too much into. But the fundamental error is presuming bonds could somehow price things stocks fail to. No liquid market is more efficient than another. Both discount widely known information equally rapidly, and the investor pools often overlap. Stocks don’t predict bonds, and bonds don’t predict stocks.

MarketMinder’s View: Since this is inherently political, please note MarketMinder is nonpartisan, never preferring any party or politician over others. Our sole interest here is how congressional developments—or lack thereof—are likely to affect markets. As the headline hints, besides reopening the Department of Homeland Security after a record-long (by far) 76-day partial shutdown, there isn’t a whole heckuva lot Congress is doing … despite GOP control of both chambers and the White House. Consider the intraparty backdrop: “House Republicans are furious with Senate Republicans for jamming them with bills they don’t want to pass. Senate Republicans are exasperated with House Republicans, who are splintered into factions—whether the hard-line Freedom Caucus or blue-state Republicans or pro-ethanol members from farm states—that often tussle with each other.” Or the unsung procedural hurdle behind inaction: “House members gripe that the Senate is beholden to the filibuster rule that requires 60 votes for most legislation. The filibuster can force bipartisan cooperation. But working across the aisle has become anathema to many lawmakers, party activists and influencers. That aversion to compromise has led to gridlock and brinkmanship, pushing the country into shutdowns and toward default, over and over again.” Though we quibble with the “toward default” characterization (Uncle Sam is nowhere close to deadbeat and hitting the debt ceiling doesn’t raise default risk), this underscores a historic do-nothing Congress. The previous Congress passed 274 bills—the fewest since the Civil War. This one is only at 90 through late April. Notably for investors, stocks—hovering near record highs—don’t seem to mind. Indeed, we find they prefer gridlock, given it prevents government from picking winners and losers, lowering business uncertainty, while a stable legal and regulatory environment allows them to plan and invest. Moreover, all this is before midterm elections, in which the president’s party typically loses ground and likely invites even greater gridlock next year. While politics are only one market driver, we think this is a tailwind, as more fathom that a handcuffed government lowers uncertainty.